Jeff Rubin is the kind of guy I want to like. He made a remark in 2005 about sheiks and mullahs controlling oil supplies that provoked his handlers at CIBC, where he was chief economist for 20 years, to send him on a course to heighten his sensitivity and political correctness. If my former employers at Statistics Canada had been nearly as skittish, I could have spent much of my 36 years there taking courses. Anyway, the course apparently had its desired effect on Rubin, as his new book on The End of Growth is as politically correct as it gets when it comes to decrying our addiction to autos and suburbs, our indifference to climate change, and ultimately our grubby materialism.

This book is an extension of his previous work, in which he predicted high oil prices were here to stay, and would fundamentally alter how and where we live and work. In this book, he extends this thesis to claim that permanently high oil prices will permanently cripple economic growth. The book notes that this may not be all bad, since the end of growth would reduce greenhouse gas emissions, although I think for most people that would not take the sting out of being unemployed. We are told the end of growth may even be good, since some studies supposedly have found happiness and incomes are not closely linked. Whenever I hear that argument, I recall the saying, “People who don’t think money can buy happiness don’t know where to shop.”

For an economist, Rubin displays a distressing lack of knowledge of how economics works, something surprisingly common in the profession. He repeatedly says the way to discourage energy consumption is to raise its price, which would be true if price was the only relevant variable. But look at the data on gasoline consumption by Canadians. Even as the price of filling up the tank rose over the last decade to record levels, Canadians kept buying more gasoline. Why? Because they could afford it, partly because the plunging cost of heating homes with natural gas capped the total energy bill to households and mostly because incomes rose.

This income effect, as economists call it, also explains why global oil consumption has risen steadily over the last decade. China, India and other rapidly developing countries can afford higher oil prices, which they regard as a small price to pay for their rapid economic growth. Indeed, it is this very acceleration in oil consumption that has sustained higher oil prices. While supply has risen, notably with the expansion of Canada’s oil sands, it has struggled to keep up with demand. Energy consumption fell only in countries like the U.S. at the worst of their recessions, because the impact of shrinking jobs and incomes reinforced, rather than offset, the impact of higher prices.

Rubin’s almost exclusive focus on high oil prices ignores falling prices for other types of energy, notably shale gas, and the opportunities for substitution. What scares me about the high price of oil today (and not all oil prices are in triple digits) is not its impact on economic growth, but the arbitrage opportunities it creates, both within the market for oil and between oil and other sources of energy. This is why you can’t open a business paper without reading a story about new pipelines to move lower-priced oil from the interior of North America to the higher-priced peripheries, or about converting coal-fired power plants to natural gas, or about using natural gas in vehicles. Rubin claims “a magical new power source isn’t waiting in the wings to solve Japan’s energy problems.” Don’t tell that to companies trying to build liquefied natural gas terminals on the B.C. coast to ship our cheap gas at $2 per million BTU to Asia, where it trades for $16. Sounds like magic to me.

Historically, the high price of a once-dominant energy source did not lead to the end of economic growth, but to the shift to new and ultimately cheaper energy sources. When Britain began to run out of wood as its primary energy source, it developed its coal resources. When coal prices soared in the mid-19th century, leading to what today would be called Peak Coal and the inevitable Royal Commission into coal’s prospects, the world miraculously discovered petroleum. And then we developed electricity, gas and nuclear power as new energy sources. The rule is that cheaper energy will drive out more costly alternatives. If that happens before we can fully exploit the oil sands, the Athabasca region will revert to being a desolate landscape of interest only to moose and the occasional trapper, forgotten by the environmentalists who are so determined to slow its development.

More than its shaky analysis of energy prices and supplies, the bigger problem with The End of Growth is Rubin’s lack of understanding of the ultimate sources of economic growth. Economic growth took off over the last couple of centuries not because of cheap oil but because of the rapid increase in the exchange and creative use of knowledge. As Matt Ridley concluded in The Rational Optimist, “a billion pages of knowledge make up the book of human prosperity.” Of course, one of the first areas where we applied this knowledge was finding new energy sources to lower its price, and we’ll undoubtedly do that again.

But more fundamentally, economic growth comes from exchanging our knowledge and extending it to new areas, notably technology. The owner of one of today’s cellphones has access to better mobile communications than the president of the United States had 25 years ago, and if it is a smartphone, more information than the president had access to 15 years ago. The low and falling cost of communicating ideas and information by mobile phones, the Internet and satellite are stimulating growth more than it is being deterred by the cost of moving people and things.

The role of knowledge in economic growth is so paramount that predicting The End of Growth is tantamount to predicting The End of Thought. After reading this book, maybe we are closer to the latter than I imagined possible. Keep me away from courses that heighten sensitivity but dull the ability to do sound economic analysis.
Financial Post
Philip Cross is the former chief economic ­analyst at Statistics Canada.

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